Strategic financial innovation in segmented markets

We study an equilibrium model with restricted investor participation in which strategic arbitrageurs reap profits by exploiting mispricings across different trading locations. We edogonize the asset structure as the outcome of the security design game played by the arbitrageurs. The equilibrium asset structure depends realistically upon consideration such as depth, liquidity and gains from trade. It is not socially optimal in general; the degree of inefficiency depends upon the heterogeneity of investors. Finally we use this framework to formally analyse Shiller's conjecture of the optimality 'macro markets'.